From Klein's prepared remarks:
I specialize in the economic theory of organizations—their nature, emergence, boundaries, internal structure, and governance—a field that is increasingly important in economics and was recognized with the 2009 Nobel Prize awarded to Oliver Williamson and Elinor Ostrom. Ronald Coase, founder of the field, is also a Nobel Laureate). Much of my recent research concerns the economics of entrepreneurship and the entrepreneurial character of organizations, both privateand public. Like business firms, public organizations such as legislatures, courts, government agencies, public universities, and government-sponsored enterprises seek to achieve particular objectives, and may innovate to achieve those objectives more efficiently.
Public organizations, like their for-profit counterparts, may act entrepreneurially: They are alert to perceived opportunities for gain, private or social, pecuniary or not. They control productive resources, both public and private, and must exercise judgment in deploying these resources in particular combinations under conditions of uncertainty. Of course, there are important distinctions between private and public organizations—objectives may be complex and ambiguous, performance is difficult to measure, and some resources are acquired by coercion, not consent.
In the remarks below I evaluate the Federal Reserve System—and the institution of central banking more generally—from the perspective of an organizational economist...
The problem is not that the Fed has made some mistakes—perhaps addressed by restating its statutory mandate, scrutinizing its behavior more carefully, and so on—but that the very institution of a central monetary authority is inherently destabilizing and harmful to entrepreneurship and economic growth....
Ironically, though economics clearly teaches the impossibility of efficient resource allocation under centralized economic planning, as demonstrated (theoretically) in the 1920s and 1930s by economists such as Ludwig von Mises and F. A. Hayek, and (empirically) by the universally recognized failure of centrally planned economies throughout the twentieth century, many people think that the monetary system is an exception to the general principle that that free markets are superior to central planning. When it comes to money and banking, in other words, it is essential to have a single decision-making body, protected from competition, without effective oversight, possessing full authority to take almost any action it deems in the best interest of the nation. The organization should be run by an elite corps of apolitical technocrats with only the public interest in mind.
And yet, everything we know about organizations with that kind of authority, without oversight, or any external check or balance, tells us that they cannot possibly work well....
The Fed simply does not know the “optimal” supply of money or the “optimal” intervention in the banking system; no one does. Add the standard problems of bureaucracy—waste, corruption, slack, and other forms of inefficiency well known to students of public administration—and it becomes increasingly difficult to justify control of the monetary system by a single bureaucracy.
This is especially true when the good in question is money, the only good that exchanges against all other goods, meaning the good in which all prices are quoted. Mismanagement of the money supply not only affects the general price level, but distorts the relative prices of different goods and industries, making it more difficult for entrepreneurs to weigh the benefits and costs of various forms of action, leading to malinvestment, waste, and stagnation. Price inflation rewards debtors while punishing savers, just as artificially low interest rates reward homeowners while punishing renters
.
Instead, market forces should determine levels of borrowing and saving, owning and renting, and entrepreneurial activity. Put differently, the monetary system is so important that it cannot be entrusted to a government agency—even a scientifically distinguished, nominally independent, prestigious organization like the Federal Reserve System...
My own views on monetary theory and policy derive from the “Austrian school” of Ludwig von Mises, F. A. Hayek, Murray N. Rothbard, and other important scholars and analysts From this perspective, the cause of the housing bubble was not irrational exuberance, corporate greed, or lack of regulation but the highly expansionist monetary policy of the Fed under Chairmen Greenspan and Bernanke.
After the dot-com crash the Fed turned on the printing presses, increasing the monetary base by 5.6% in 2001, 8.7% in 2002, and 6.3% in 2003, while MZM rose by 15.7%, 13.0%, and 7.3% during those years. Greenspan slashed the federal funds rate from 6.5% in January 2001 to 1% by June 2003, keeping it at 1% until late 2004, a level not seen since 1954. This infusion of credit led to overinvestment in housing and other capital-intensive industries, aided by federal government policies designed to increase the rate of home ownership by relaxing underwriting standards...
Economist Lawrence Ball produced an interesting paper in February of this year on the psychology of the chairman.
Ball traced the evolution of Bernanke’s thinking between 2000 and 2012, arguing that, since 2008, “the Bernanke Fed has eschewed the policies that Bernanke once supported.” Ball attributes to the change in Bernanke’s thinking to groupthink and to the chairman’s own personality, which Ball describes as shy, withdrawn, and unassertive.
Without intending to, Ball makes powerful arguments against discretionary monetary policy itself, which relies on a small, elite group of powerful technicians, interest-group representatives, and political advisers to design and implement rules and procedures that affect the lives of millions, that reward some (commercial and investment bankers, homeowners) while punishing others (savers, renters), that shape the course of world events. Under central banking, there are no rules, only discretion. Do we really want a system in which one person’s personality type has such a huge effect on the global economy?...
How, then, is price stability to be maintained? The answer is that the economy doesn’t need “stable” prices, just market prices. Some of the proposals discussed at this hearing suggest removing the Federal Reserve Act’s language about “maximum employment,” keeping just the part about “stable prices.” Eliminating the dual mandate would be a step in the right direction, as it would reduce the Fed’s incentive to increase the money supply when unemployment rates rise beyond some arbitrary threshold. But the requirement of price stability should be removed as well. The idea that a central bank is need to maintain a stable or modestly rising price level—to prevent high levels of inflation, in other words—is based on a misunderstanding of inflation. In a growing economy, with a stable or slightly growing money supply (as under a commodity standard), prices will tend to fall, as in the US during the 19th century, when the US experienced dramatic increases in production and living standards. Price levels rise because the real economy is shrinking or—as is almost universally the case in practice—because the money supply is increasing faster than the increase in real production. Inflation is not caused by an “overheated” economy that the government needs to somehow cool off. ...Central banks don’t fight inflation; they create it.
I bet few in Congress were awake for this gem.
ReplyDeleteWow, great speech by Professor Klein!
ReplyDeleteI bet he just lost his invitation to speak at a future FRBNY luncheon!
We can only hope... No, pray...
ReplyDeleteTom Woods, if you are reading this, invite Professor Klein on your or Peter Schiff show. Pronto, pro favor.
ReplyDeleteMaybe Paul Krugman will agree to debate Professor Klein.
ReplyDeleteMr. Wenzel, the connected person he is, got an early copy of the hearing testimony.
ReplyDeleteAccording to Rep. Paul's website:
http://www.paul.house.gov/index.php?option=com_content&task=view&id=1969&Itemid=28
"The hearing will be held on Tuesday, May 8th, at 10:00 a.m. in room 2128 of the Rayburn House Office Building."
Witnesses to include:
Panel I
Representative Kevin Brady (R-TX)
Representative Barney Frank (D-MA)
Panel II
Dr. Jeffrey M. Herbener, Chairman, Economics Department, Grove City College
Dr. Peter G. Klein, Associate Professor, Applied Social Sciences and Director, McQuinn Center for Entrepreneurial Leadership, University of Missouri
Dr. John B. Taylor, Mary and Robert Raymond Professor of Economics, Stanford University and George P. Schultz Senior Fellow in Economics, Hoover Institution
Dr. Alice Rivlin, Senior Fellow, Economic Studies, Brookings Institution, and former Vice Chair, Federal Reserve Board of Governors
Dr. James K. Galbraith, Lloyd M. Bentsen, Jr. Chair in Government/Business Relations, LBJ School of Public Affairs, University of Texas at Austin
Congress gives the Fed a monopoly on the currency in exchange for a guaranteed demand for government bonds. Its a crooked arrangement. Congress could care less about the Fed contributing to the boom bust cycle or destroying the purchasing power of the dollar. They just care about their own money and power, to hell with common sense. Without the Fed, they wouldn't have the cash to fight their wars or push their pet projects that enrich their cliques.
ReplyDeleteGo, Klein, go!
ReplyDeleteToo much more of this kind of talk will surely get the internet shut down. Good luck stopping us Big Brother!
ReplyDelete